Rolling Covered Calls on thinkorswim® Desktop

Upbeat music plays throughout.

Narrator: Hello, traders. I'm Scott Conner.

Strategy Roller^® is a feature of the thinkorswim® desktop platform used to manage covered call option strategies. By setting up a rolling strategy, you can automate the rolling of your short call from one expiration to another, according to simple rules that you specify ahead of time.

On-screen text: Disclosure: Rolling strategies can entail additional transaction costs, including multiple contract fees, which may impact any potential return.

Narrator: Now let's jump right in the software and show you how this works.

On-screen text: Disclosure: Specific securities used to demonstrate trading functionality were selected randomly.

Animation: The mouse points to the Strategy Roller tab. Next, the mouse clicks on the Apple position revealing a list, from the list Create rolling strategy is selected.

Narrator: Now there's two ways to actually execute this. Number one is follow my mouse. I can click on the Strategy Roller, which will take me to the function. Or in the position statement, right where Apple is, if I open up Apple, I can see my short call. And by right clicking on that call, I can jump up here to Create rolling strategy, left click on that, and there we are.

Animation: The mouse clicks on the Rolling Strategies section revealing no current rolling strategies. Then the mouse highlights position in the Edit Rolling Strategy section.

Narrator: We're right in to the rolling strategy section. First we can see any existing rolling strategies right here. And we can drop that and open that up. And you can see this account, there are no rolling strategies at this time. Down below, we have Eligible Positions. And what this will do is go through your position statement and look at different positions you have that are eligible. For example, we have Apple, a short call there, a covered call. And of course, Microsoft, a covered call strategy there.

Now with our example in Apple, let's go over the purpose of using the Strategy Roller. What we're attempting to do is set up an automated way or approach to moving a short call out to a future date. And by us choosing all the different features we want in terms of strikes, prices, times, dates, expirations, that can all be done in one mechanized fashion.

Animation: The mouse is highlighting the Strategy Settings section.

Narrator: First of all, the question is, how many of the options do we want to roll forward? Well you can see in this case, we have one, and that's the default setting. If I had, for example, several covered calls, I could choose how many of those calls available.

Animation: The mouse selects Strike in the Market Sentiment criterion. Then the mouse uses the plus and minus buttons to determine which strike to use.

Narrator: Next, it's going to ask me what strike do I want to roll my current short call to? The default setting, of course, is the at the money call. So the strike that I'm using is the at the money. Now of course I can change this higher to use one strike or two strikes or three strikes out of the money. And I can also go below zero and start choosing strikes that are further in the money. One strike in the money, two strikes, and three strikes, for example.

Animation: The mouse selects Delta and then uses a sliding scale to determine which delta to select.

Narrator: Now a second way to choose your strike is by looking or aligning the delta of that call. So I'll move down here and click on Delta. And you can see it starts off with a .50 delta, which is again, the at the money call. Now if I'd like to change that, just click on the .50 delta, left click. And you can see, depending on whether I'm bullish or bearish on the outlook for the stock, that could help influence what delta I'm choosing.

For example, if I'm bearish and I think the stock might be moving slightly to the downside, I might want to move this up to a further in the money call with a higher delta, maybe like .75. If I'm bullish and I think the stock has some upward movement potential, I'm going to choose an option that has a lower delta or, of course, further out of the money. Of course, the choice is yours.

For our example in Apple, let's go ahead and choose an out of the money call that is three strikes away. So I'll move up to Strike, leave that on three strikes out of the money, OTM, and because my outlook perhaps would be that I'm bullish and I would like to give room for the stock to move a little bit higher.

Animation: The mouse highlights the Roll to Expiration criterion.

Narrator: Now let's go to the final step of choosing the expiration date that we would like to roll our call to. As you can see in our example, our Apple short call expires on the 13th of March. But down below, their expiration date is the 20th of March.

Animation: The mouse highlights the Begin Strategy criterion and then uses the plus and minus buttons to change the number of trading days from expiration.

Narrator: So you can see it defaults to the next expiration date, and this happens to be one week. Now of course we can choose different expiration dates for that call that we're rolling to. Now that we have our strikes and expiration dates chosen, let's get down to the actual order itself. Now to do that, I'm going to Additional Options.

And the first thing I'm going to look at is when do I want my strategy to begin? How many days from expiration? Now we're looking at two days before expiration. If I'd like that to be a little bit earlier, like four or five days before expiration, I can certainly change those days.

Keep in mind, there's a trade-off. The closer we are to expiration, the less premium will be left in that option.

Now what about the order price? How is it going to get filled? At the bid, the offer, or somewhere in between? Now we're starting off at a 50% level in between the two, so it's certainly up to you to choose which way you would like those orders to go out. If you want it to be midpoint between the bid and ask, you can just slide the bar right down to the midpoint, and that will take care of that.

Now what about the active time of day? Well this simply tells us, when do we want the order to be in? So for example, if I didn't want that order to go out till maybe 15 minutes after the opening, well I'd choose 8:45. I can also manually enter those times, say, for example between 9:00 and 2:50, as the example here.

Now I'm going to scroll down just a little bit further and show you how you can actually do this same thing manually. I can grab the little slide bar here. And as you can see as I move that, you can see the same number changing in the box up above. So this makes it a little bit simpler to say, well listen, I don't want that order to go out till around 9:30. And then again, I'd like to be a little bit closer before the close, maybe at, let's say, about 2:20, and we'll use that. Now again, if that is your choice, you can go ahead and move those to those values.

And finally, I'm going to take this down to one day before expiration.

Well let's say I want to move that out to maybe something like 2 o'clock or 2:30, maybe something like that, but sometime obviously before the close. Now in the case that we're not using one day till expiration and we have several days until expiration, the move to market order function will not take place until that final day.

Next let's look how a trader can be notified about any Strategy Roller positions. I click on the Notification tab here. And I'm going to move to the Edit Notification Settings.

Animation: The User Setup pop-up window appears on screen.

Narrator: Now what you'll see here are some things you need to go through to be notified. First of all, once you've supplied an email address, you'll have choices to some different things that you can be notified about. Now in our case, we've confirmed our email address and our SMS text number. We've also checked on Rolling strategy events.

And now you can see where we can make some choices as to how we get notified, whether email and/or both SMS, and of course when to notify us. We can see by default, again, that we will be told anytime there's an active order or a routed order.

Animation: The mouse clicks on Apply Settings and the pop-up window disappears.

Narrator: But again, we have a couple other choices. In our case, we'll leave them all in place and hit on Apply Settings. Now we can see confirmation of the notification settings that we chose. And down below, we have a written confirmation of all the parameters that we chose above for our rolling strategy order.

Animation: The mouse clicks on the Confirm and Activate button and the Rolling Strategy Confirmation Dialog window appears.

Narrator: The next step would be to confirm and activate the trade. So I'll left click on that button. And of course, now you can see all the information about the account number and some of the specifics of the trade.

The final step would be to click on Activate to actually make this order become live.

Animation: The screen goes back to the initial Strategy Roller tab. The Rolling Strategies section is open revealing the Apple covered call example. The mouse then highlights some of the columns and corresponding information related to the order.

Narrator: We can now see under rolling strategies all the parameters of our rolling strategy. Now this order is waiting a trigger, and of course that is three days. It will begin three days before the expiration of our short call, which is the 13th of March.

On-screen text: Disclosure: Please note: Assignment of all or part of your short call position will automatically cancel your rolling strategy.

Narrator: Now it's important to remember that we're setting in place a process of rolling strategies. In other words, this will continue to roll even our 20th of March option under these same parameters that we have set in place now. So effectively, this will keep rolling as the weeks come forward.

Now if I go over to my number three days and I right-click on the box, I can stop this strategy and cancel it at any time. I can replace the rolling strategy and change or edit some of the different parameters.

And of course I can view the timeline of any past rolls that have already occurred. And now if we go back to the Activity and Positions page, we can also see our rolling strategy if we scroll down to Rolling Strategies. Click on that, and of course you can see that same order with all the same parameters listed right here.

And that's how you use Strategy Roller to roll covered calls.

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